The stock market trended down most of last week, but investors’ animal spirits were lifted on Friday after an unexpectedly positive jobs report was released, as well as some positive earnings reports. The the benchmark S&P 500 Index rose 1.2 percent on Friday to help the index close the week up almost 0.5 percent. However, I would caution anyone not to overreact to the monthly jobs report, as it is usually inaccurate and premature, subject to large revisions in future months as well as statistical “seasonal averaging” to flatten out the raw statistics.
Let’s put Friday’s job total in context. First, ADP reported on Wednesday that only 89,000 private sector jobs were created in September, a number that would fall far short of Friday’s total. Also, ADP said large businesses—those with over 500 employees—lost a net 83,000 jobs, while small businesses (with 49 or fewer workers) created 95,000 jobs, and those in the middle (50–499 employees) added 72,000 jobs.
Then, on Friday, the widely watched Labor Department report claimed that 336,000 net new payroll jobs were created in September, which was nearly double the economists’ consensus estimate of 170,000 jobs and almost four times as many jobs as the payroll company (ADP) had reported two days earlier.
In addition, July and August payrolls were revised higher by a cumulative 119,000 jobs, showing once again how unreliable their initial estimates were. The rest of the key numbers were virtually unchanged from August: The unemployment rate was unchanged at 3.8 percent. The average hourly earnings rose by just 0.2 percent ($0.07), to $33.88 per hour, and the labor force participation rate remained unchanged at 62.8 percent.
A closer look at the data for the last quarter (July 1–Sept. 30) shows that the nature of the new jobs reflects a continuing manufacturing recession and the continued growth of big government.
Of the 799,000 total non-farm payroll jobs created in the last quarter, 214,000 (26.8 percent) were government jobs, with 497,000 jobs in services (62.2 percent) and only 88,000 (11 percent) in goods-producing, with only 26,000 of those jobs in manufacturing. With the United Auto Workers (UAW) strike, and other strikes beginning, this could be the last positive payroll report this year, as high interest rates and strikes could reduce job totals in future months.
The Institute of Supply Management (ISM) reflected this bias for services over manufacturing when it reported that its manufacturing index remained below 50 (at 49 in September, up from 47.6 in August). Any reading under 50 signals a contraction, and fully 11 of the 16 industries ISM surveyed contracted in September. In contrast, ISM reported on Wednesday that its non-manufacturing (service) index remained above 50 (at 53.6 in September, down from 54.5 in August). Their service business activity component rose to 58.8 in September, up from 57.3 in August, so services continue to dominate economic growth.
Turning to earnings, the best performing stock in the S&P 500 last Thursday was Lamb Weston Holdings, Inc. (LW) after it announced that its latest quarterly sales rose 47.8 percent to $1.67 billion versus $1.13 billion in the same quarter of 2022. During the same period, the company’s earnings rose 117.3 percent, to $1.63 per share versus $0.75 last year. The analyst community was expecting sales of $1.596 billion and earnings of $1.15 per share, so LW posted a 4.5 percent sales surprise and a 41.7 percent earnings surprise. The company also provided positive guidance as it benefits from a potato shortage that has sent frozen French fry prices soaring.
Even though crude oil prices have contracted, natural gas has resumed rising, so I feel the earnings surge for the next few quarters will continue in energy stocks, especially considering new geopolitical realities and the fact that crude oil inventories are at their lowest level in 14 months. Specifically, natural gas prices tend to rise in hot miserable summers (for peaker power plants) and very cold winters (for heating).
This winter is forecasted to be much colder for both Europe and North America due to an El Niño weather pattern, which bodes well for higher natural gas prices. Specifically, an El Niño weather pattern controls the flow of the subtropical jet steam over the southern United States. On the other hand, the real jet stream that emanates from the Arctic will be trapped by the El Niño subtropical jet steam, so that means it will be cold for the northern United States, which is great for higher natural gas demand. Europe is also impacted by an El El Niño weather pattern controls the flow of the subtropical jet steam weather pattern as Europe is situated at a higher latitude than the United States, so Europeans are also expected to face an abnormally cold winter, which bodes well for U.S. liquefied natural gas (LNG) sales and stocks like Dorian.
The refinery industry is poised to post very strong earnings. First, there is a diesel shortage, especially in Europe, so the United States is exporting more distillates (i.e., diesel, heating oil, jet fuel, etc.). Second, refineries are scheduled to shut down in the upcoming weeks to shift to oxygenated winter fuels, so the inventories of refined products are expected to remain seasonally low. The Wall Street Journal reported on Thursday that the gross margins for gas stations were $0.404 per gallon this year, but spiked to $0.60 recently.
Fortunately, the seasonally strong time of year has arrived, and an “early January effect” may follow. In this time frame, I expect seasonal strength for small- to mid-capitalization stocks to persist through May, due in large part to easier year-over-year comparisons. Due to slowing worldwide economic growth, I expect inflation, excluding energy inflation, to continue to ebb. Furthermore, due to the anticipation of 4 percent unemployment due to the expanding UAW strikes, I expect the Federal Reserve will cut key interest rates at the December meeting of its policy-setting Federal Open Market Committee. I am optimistic about the upcoming third-quarter earnings announcement season, starting this week. This should propel our growth stocks higher, perhaps through next summer.
